Pre-Money vs. Post-Money: An Overview
What's the difference between pre-money and post-money? The short answer to this question is that pre-money and post-money differ in timing of valuation. Both pre-money and post-money are valuation measures of companies and are crucial in determining how much a company is worth.
Pre-money valuation refers to the value of a company not including external funding or the latest round of funding. Pre-money is best described as how much a startup might be worth before it begins to receive any investments into the company. This valuation doesn't just give investors an idea of the current value of the business, but it also provides the value of each issued share.
On the other hand, post-money refers to how much the company is worth after it receives the money and investments into it. Post-money valuation includes outside financing or the latest capital injection. It is important to know which is being referred to, as they are critical concepts in the valuation of any company.
What’s The Difference Between Pre-Money And Post-Money?
Let's explain the difference using an example. Suppose an investor is looking to invest in a tech startup. The entrepreneur and the investor both agree the company is worth $1 million and the investor will put in $250,000.
The ownership percentages will depend on whether this is a $1 million pre-money or post-money valuation. If the $1 million valuation is pre-money, the company is valued at $1 million before the investment and after investment will be valued at $1.25 million. If the $1 million valuation takes into consideration the $250,000 investment, it is referred to as post-money.
As you can see, the valuation method used can affect the ownership percentages in a big way. This is due to the amount of value being placed on the company before investing. If a company is valued at $1 million, it is worth more if the valuation is pre-money than if it is post-money because the pre-money valuation does not include the $250,000 invested. While this ends up affecting the entrepreneur's ownership by a small percentage of 5 percent, it can represent millions of dollars if the company goes public.
The difference between pre-money and post-money gets very important in situations where an entrepreneur has a good idea but few assets.
In such cases, it's very hard to determine what the company is actually worth, and valuation becomes a subject of negotiation between the entrepreneur and the venture capitalist.
Calculating Post-Money Valuation
Calculating post-money valuation is straightforward. You take the dollar amount of the investment and divide it by the percent that the investor is getting. Consider an example where $2 million is divided by 10%, yielding a post-money valuation of $20 million. Prior to the $2 million investment, the company is not worth $20 million. This is because once you add $2 million worth of cash to the company’s balance sheet the company has just increased in value by $2 million.
Calculating Pre-Money Valuation
To calculate the pre-money valuation, it requires an additional step after establishing post-money valuation: subtract the amount of investment from the post-money valuation. In the example above, the company is being valued at $18 million. This is calculated by taking the $20 million post-money valuation and subtracting the amount of the investment ($2 million). This calculation results in a value of the company, as it exists today, before the additional funds are received by the company from the investor.
With a pre-money valuation, you can calculate the per-share value of the company. To do that, divide the pre-money valuation by the number of outstanding shares.
- Pre-money and post-money differ in timing of valuation.
- Pre-money valuation refers to the value of a company not including external funding or the latest round of funding.
- Post-money valuation includes outside financing or the latest capital injection. It is important to know which is being referred to, as they are critical concepts in valuation.